So with natural gas futures briefly touching below $3/btu last week and at their lowest levels in a decade I'm strongly considering buying an April OTM call spread
I have very limited knowledge trading NG though I trade other non-related commodities like light sweet crude and gold for myself.
The $3.70 strike and $4 Apr NG calls are going for .055 and .025 respectively which seems tempting considering those calls too are going for historically low prices, but at the same time I'm still somewhat skeptical as they are still cheap.
Aside from temperatures continuing to stay unexpectedly warm in the Northeast are there and EIA supply staying above 77 to 81 bcf, are there any other factors as to why NG would continue to have downside?
Well the jet stream came into place last week finally (as indicated by the cold front that smacked the entire eastern seaboard) so that will allow for more instances of colder temperatures. I doubt that we'll see many above-average degree days until at least late Feb / early March
Right so I would imagine that should be bullish for NG yet the front month just dipped below $3/btu to be off 2% as we speak and the calls are still trading at their contract lows.
I'm pretty sure I can't be the only one thinking about a sharp sudden upside to NG, so are major players in natty predicting warmer than usual weather still throughout the NE or possibly a supply glut?
Shale drilling continues at a frantic rate - on pace for about 17.2-17.5k new wells this year. To bring us back to $4.00-4.50 gas, we'd need a decrease in drilling to about 16.2k wells, or an extremely cold winter. Neither is likely - and I'm staying away from natural gas.
In real terms we probably are at historical lows. I am seriously considering buying UNG and just sitting on it for 2 years. Predicting supply/demand (drilling perspective) is not as easy as it sounds and meteorologists can't predict the weather passed 3 days in advance beyond 50% accuracy.
Options and market timing are tough. Guess I should do some research about the premiums for leaps. I like UNG here. I'll take the chance to slowly scale in at historic lows. I would love to see a sharp breakdown here to get an even better price edge for the long-term.
All those drilling expectations are largely priced-in. Nat gas looks so shitty here it's a buy if you can hold through the pain. Herd in the short-term but be a contrarian in the long-term.
You might be better off selling some puts. It seems like the decline has slowed down in its pace, but I don't see much room for that big of an upmove. The put skew and vol is also relatively jacked compared to historic norms. It isn't took expensive to sell between one and four or so 10-25d puts on it and collect a little bit.
Premium on the Feb 3 Puts currently going for .091 so my break even is around 2.909 with 17 calendar days remaining in the option. NG_F touched 2.94 on Jan 3 so not too sure about that
Premium on Mar 3 Puts though currently going for .148 which puts my breakeven at 2.852 which looks more appealing but with 48 calendar days to expiration and as mb666 aptly said... really hard to determine what the weather will look like outside of the next few days even with the best satellites (remembering how no one predicted that snowstorm that hit the NE on Halloween until about a day before)
Why the $3 put? I'm talking about something with some skew in it that is a bit away. $2.7-2.9 areas would be much more appropriate.
Sure, there are 48 days to expiration and it could go lower. That's the risk. I think the EV is higher on selling the puts at the moment. MMs are short them, which is in large part why they are so jacked. I think NG could sell off a bit more, but I don't think it is going to be by a dramatic amount.
The call spread just sucks. I mean you're betting on that dramatic of a rally with all of the fracking activity going on? Even with some cold fronts and whatnot, you're in dire need of a big upswing which just doesn't seem to have much of a chance at this point. If you want to bet on the big up move you may as well just buy some $4-4.50 calls or some bs like that and sell them on a gap up.
I work in energy, so will no say much. That said I suggest you read Goldman's latest on energy before you look at any natgas trades for Calendar 12.
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what should end of season storage look like given normal weather bal winter? what keeps producers form running rigs at full tilt? what do rig breakevens look like? i agree things look cheap but to get back to $4 is a tough ask. weather models trended a bit colder today in the medium range and we still ended up down 5 cents.
Sounds like a really good way to lose your shirt.
E&P capital budgets are being shifted into liquids rich plays right now. The only problem, of course is that these are only partially liquid. I see supply increasing for the time being and continuing downward pressure.
Dangerous game. http://www.rigzone.com/news/article.asp?a_id=113890
Points well taken guys.
I was also exploring what effects any conflict in the Middle East/Strait of Hormuz might have on Natural Gas if any... and it looks to be relatively minimal as we receive most of our imports from Canada (The only exception to this being the Arab Gas Pipeline in Egypt which was attacked back in November)
http://www.eia.gov/dnav/ng/ng_move_impc_s1_a.htm
This despite Iran being the world's #4 natural gas producer, and #2 in reserves (and most seem to be untapped)
US natgas is almost completely disconnected from that market. Any price movement will be minimal. Supplies are very high right now. A few E&P companies have shut in wells waiting for upward price movement (yeah, it's that bad).
Nat gas broke down hard today... I'm buying here and holding for 2 years.
Supply/demand expectations are largely priced in. The selling is being done by people who have been invested in NG for a while and can no longer tolerate the pain.
This is a huge deal. People are losing their shirts.
Shirts. Shirts everywhere.
I bought 3,500 shares of UNG at $6.05 yesterday... ~21k. I intend to hold for two years though. Fortunately I don't have any more capital and this will prevent me from doubling down.
It's already down to $5.80. Good thing I joined the gym because I may have to get used to walking around with my shirt off... at least in the short-term.
BAML coming out and saying that they could see natty going below $2/btu due to the glut of supply... what everyone seems to be saying... and they're not seeing weather in the NE getting any colder for the forseeable future
Found this nice chart of natty going back to 2001. Seems like the record low for natural gas was in October of 2001 of about $1.80/btu
http://www.tradingeconomics.com/commodity/natural-gas
Otherwise feb futures off -6.5% right now @ 2.75/btu. Curious what tomorrow's EIA numbers come out. Consensus so far calling for -97 bcf for total supplies of 3375 bcf?
I'm waiting and seeing for a good entry point...
I wonder if we goto 0, does UNG go broke.
I know drillers in the Marcellus shale and industrial construction equipment brokers who deal with them and they do not care if NG goes beneath $2, they will drill until you can grow shit in the local tap water.
But seriously, someone has got to be going broke pretty soon now because this is outrageous.
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